European Banks in Adapt or Die Moment From Tech, Deloitte Says

European banks face threats on two fronts: from innovative tech companies nibbling at the edges of traditional profit drivers, and upstart banks that have a better chance at winning customers at a lower cost than ever before, a report published Monday from Deloitte LLP said.

Although internet banking and financial technology innovation isn’t new, the risks of not changing and refocusing are more serious than in the previous two decades, the report said.

“There are threats all along the business,” said one of the report’s authors, Margaret Doyle, head of Financial Services Insight for the professional services firm. “The position of banks has been weakened by the financial crisis, both in financial terms and in public perception.”

Payment companies like Ebay Inc.’s PayPal, payment system Square Inc. and Sweden’s Klarna AB have taken over large chunks of the market for online transactions, and more startups are waiting in the wings.

To increase consumer confidence in its services, PayPal has bulked up its Buyer Protection scheme. Klarna on July 1 will become available in the U.K. and said it would likely spend at least £100 million ($170 million) expanding in the country.

Lending or funding companies such as London-based peer-to-peer Funding Circle or New York City-based Kickstarter have provided an alternative source of financing, and companies such as London-based TransferWise offer lower-cost currency transfers. And in a U.K. first, Banco Santander SA last week said it had agreed to work with Funding Circle to refer loans from smaller businesses to the online company.

The report said tech companies could “fundamentally undermine the traditional integrated bank business model.”

In addition to handling payments, those companies could have access to the underlying data that can say a lot about a consumer – what they like to buy, when, and what they might buy next.

“That’s the treasure trove,” Doyle said.

On the other hand, banks face a bigger threat from new, upstart banks, the report said. Customers who previously might have been wary depositing their money into an unknown startup bank have more protection, now that the EU guarantees deposits up to €100,000 ($136,000).

Deloitte estimated it would only take £10 million to start a bank and £5 million a year to keep it going, using off-the-shelf software, with costs rising as more customers joined.

“The point is you can get your toe in, you can get a foothold in the market the way that you couldn’t have done 10 or 20 years ago,” she said.

There are signs that banks are trying to keep ahead of the curve. Barclays PLC has opened a startup accelerator, or a business that helps new businesses grow. HSBC Holdings PLC recently slashed its fees for foreign currency transfers and ramped up its investment in financial technology.

And other banks are remodeling their offices to attract young employees who might be otherwise tempted to join tech firms.